Why do 90% of businesses not trade for more than 10 years?

The UK has a new Chancellor of the Exchequer, Philip Hammond will have to make sure his economic blueprint is clear and timely to protect UK businesses

The United Kingdom (UK) has a new chancellor. An Oxford Graduate, Philip Hammond, is now charged with the economic ramifications of Brexit. After a G20 summit recently in China, he told everyone that the “Brexit Blueprint would reassure businesses and markets”. Not much meat on the bones as of yet and a comment that the Blueprint will come later in the year (1).

International deals including Europe could be ones to suffer for Businesses. Baker McKenzie, a law firm, have estimated it could be as much as one trillion dollars if there is not a Blueprint that is clear (2). Mr. Hammond will have to make sure his Blueprint is clear and timely!

With pressures increasing globally, in the European Union and in the UK at the minute the business environment has another layer of complication.

Why do 90% of businesses not trade for more than 10 years? Is success a bit of luck and can weaknesses or barriers to entry or longevity be overcome?

Only one in ten make it over the 10-year mark.

That figure covers all businesses. Start-ups, micro, small businesses and shockingly about 70% of VAT registered businesses (3).

There are many reasons why this is and just having a good idea or a skill in something will sadly not see you through.

Who has ever used a Spangler?

Most of us have but we commonly call it the Hoover.

James Spangler invented the portable Vacuum cleaner to abate his asthma symptoms but William Hoover bought the patent innovated and marketed it. We still call it the Hoover today - unless you have a Dyson!

Spangler had a great idea, a skill and a market but it was someone else who had the business acumen to bring it to that market and it’s still bought over a hundred years later.

The writer has worked for the last two decades with businesses to help and improve the competency of working on the business not in it.

An independent Financial Adviser (IFA) is often not the first thought an established or startup business thinks of but they can help advise throughout your journey personally and as a business.

How to use your finances is a powerful tool in order to plan, manage and grow your business. This is just one of the areas that you need good advice or competency in to be the one in ten.

When starting a business there are a massive amount of choices facing you. Perhaps one of the first is what is our legal personality? Will it be sole trader, a partnership, a Limited Liability Partnership (LLP), incorporated Limited Company (Ltd) or a charitable trust? Remember to seek good advice from your Accountant and Solicitor.

Each has various tax, commercial advantages and disadvantages; limited liability is often the major factor in a decision to incorporate, but don’t make this decision lightly. It is perhaps more complicated and costly to undo the incorporation and change your legal status than to incorporate. There is Disincorporation relief (4) available but that will have to wait for another article.

Limited companies have a few layers of taxation to consider. As a sole trader or partnership your profits are taxed when you take company profits and they are treated as income and taxed at your marginal rate of income tax.

In a company salaries are subject to Income Tax and National Insurance and profits to corporation tax. In the 2015/16 tax year the rate has been changed so everyone pays 20% on their company profits. It used to be 23% for companies who generated more than £300,000 pounds then it changed to 21% and now it is the same for larger profitable companies as it is for smaller profitable companies.

There are a number of reliefs available such as Research and Development, Patent Box and Creative Industries tax relief (5).

Capital allowances are available on plant/equipment, machinery and vehicles (4).

Remember, such items like entertaining must be added back to profits and are taxed. Also benefits that you or employees get personal use from are classed as benefits in kind and therefore subject to taxation and paid by the one who has the use or benefit (5).

Similarly, there is potentially double CGT, i.e. CGT on the shares, and the company’s CGT on its assets, though this can be mitigated in various ways such as Entrepreneurs Relief (this relief is also available to Sole Traders and Partnerships) where tax is paid at a reduced rate of 10%. The eligibility needs to be met and advice from an Accountant we would suggest on this when selling (6).

It can be appropriate to own land or buildings yourself and let the company use them. Often clients hold such assets in their pension and rent them to their companies at a commercial rate. Always be advised on such things like this there are complex rules and pitfalls if you don’t get it right.

The manner in which you form your legal personality depends on your goals and objectives for the short term and the future. Not just your business goals and objectives but also your personnel ones as well. If you want to attract investment or continuity for you and your employees when you sell or step away from the business you have been running, then these are important decisions.

Firms unaware of borrowing options

A report recently by the British Chambers of Commerce highlighted that the majority of businesses don’t know what their funding choices are beyond bank loans and overdrafts (7). For us as Independent Financial Advisers it is what we were saying above that businesses require good independent advice on the options and planning for growth, longevity and eventually sale or inheritance.

There are many decisions throughout your business journey whether setting up or with an established business and surrounding yourself with the right skillsets and advice goes a long way to being successful and one of the one in ten.